Our $680 1-year target price for Microsoft is based on 31x PE multiple to our FY28 EPS of $24.59, which we discount back to a year forward using ~12% cost of equity. We see the EPS multiple as a better valuation metric due to the more stable earnings growth for a mature company like MSFT and the ramp in near-term CapEx that result in a more volatile FCF. We see the premium 31x multiple as the appropriate and justified given the durability of growth at MSFT and their leadership position Generative AI opportunity.

We see potential downside risks to achieving our target price to be:

• The aggressive ramp in CAPEX investment in midst of the ongoing build out of GenAI capabilities could hurt longer term trajectory if GenAI adoptions are slower than expected.
• Competition in the hyperscale cloud market, requiring MSFT to aggressively invest here vs. AMZN’s AWS and GOOGL’s GCP and potentially fast deceleration in key Azure trajectory. 
• A larger acquisition that drives earnings dilution in the nearer term.